McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, All Rights Reserved

Estimating Project Times

and Costs

Chapter 5

5-2

5-3

Estimating Projects Estimating

The process of forecasting or approximating the time and cost of completing project deliverables

The task of balancing the expectations of stakeholders and the need for control while the project is implemented

Types of Estimates Top-down (macro) estimates: analogy, group

consensus, or mathematical relationships Bottom-up (micro) estimates: estimates of

elements of the work breakdown structure

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Why Estimating Time and Cost Are Important

EXHIBIT 5.1

• Estimates are needed to support good decisions.• Estimates are needed to schedule work.• Estimates are needed to determine how long the project

should take and its cost.• Estimates are needed to determine whether the project

is worth doing.• Estimates are needed to develop cash flow needs.• Estimates are needed to determine how well the project

is progressing.• Estimates are needed to develop time-phased budgets

and establish the project baseline.

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Factors Influencing the Quality of Estimates

Quality of Quality of EstimatesEstimates

Quality of Quality of EstimatesEstimates

ProjectProjectDurationDuration

ProjectProjectDurationDuration

PeoplePeoplePeoplePeople

Project Structure Project Structure and Organizationand Organization

Project Structure Project Structure and Organizationand Organization

PaddingPaddingEstimatesEstimates

PaddingPaddingEstimatesEstimates

OrganizationOrganizationCultureCulture

OrganizationOrganizationCultureCulture

Other (Nonproject)Other (Nonproject)FactorsFactors

Other (Nonproject)Other (Nonproject)FactorsFactors

Planning Planning HorizonHorizon

Planning Planning HorizonHorizon

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Estimating Guidelines for Times, Costs, and Resources

1. Have people familiar with the tasks make the estimate.

2. Use several people to make estimates.

3. Base estimates on normal conditions, efficient methods, and a normal level of resources.

4. Use consistent time units in estimating task times.

5. Treat each task as independent, don’t aggregate.

6. Don’t make allowances for contingencies.

7. Adding a risk assessment helps avoid surprises to stakeholders.

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Macro versus Micro Estimating

TABLE 5.1

Conditions for Preferring Top-Down or Bottom-Up Time and Cost Estimates

Condition Macro Estimates Micro Estimates

Strategic decision making X

Cost and time important X

High uncertainty X

Internal, small project X

Fixed-price contract X

Customer wants details X

Unstable scope X

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Estimating Projects:Preferred Approach

Make rough top-down estimates

Develop the WBS/OBS

Make bottom-up estimates

Develop schedules and budgets

Reconcile differences between top-down and bottom-up estimates

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Methods for Estimating Project Times and Costs

Macro (Top-Down) Approaches Consensus methods

Ratio methods

Apportion method

Function point methodsfor software and system projects

Learning curves

Project EstimateTimesCosts

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Apportion Method of Allocating Project Costs Using the Work

Breakdown Structure

FIGURE 5.1

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Simplified Basic Function Point Count Process for a Prospective Project or

Deliverable

TABLE 5.2

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Example:Function Point Count Method

TABLE 5.3

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Methods for Estimating Project Times and Costs (cont’d)

Micro (Bottom-Up) Approaches Template method

Parametric procedures appliedto specific tasks

Detailed estimates for the WBS work packages

Phase estimating: A hybrid

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SB45 Support Cost Estimate Worksheet

FIGURE 5.2

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Phase Estimating overProduct Life Cycle

FIGURE 5.3

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Level of Detail Level of detail is different for different levels

of management. Level of detail in the WBS varies with the

complexity of the project. Excessive detail is costly.

Fosters a focus on departmental outcomes Creates unproductive paperwork

Insufficient detail is costly. Lack of focus on goals Wasted effort on nonessential activities

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Three Views of Cost

FIGURE 5.6

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Types of Costs Direct Costs

Costs that are clearly chargeable to a specific work package.

o Labor, materials, equipment, and other

Direct (Project) Overhead Costs Costs incurred that are directly tied to an

identifiable project deliverable or work package.o Salary, rents, supplies, specialized machinery

General and Administrative Overhead Costs Organization costs indirectly linked to a specific

package that are apportioned to the project

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Contract Bid Summary Costs

FIGURE 5.5

Direct costs $80,000

Direct overhead $20,000

G&A overhead (20%) $20,000

Profit (20%) $24,000

Total bid $144,000

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Refining Estimates Reasons for Adjusting Estimates

Interaction costs are hidden in estimates. Normal conditions do not apply. Things go wrong on projects. Changes in project scope and plans.

Adjusting Estimates Time and cost estimates of specific activities are

adjusted as the risks, resources, and situation particulars become more clearly defined.

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Refining Estimates (cont’d) Contingency Funds and Time Buffers

Are created independently to offset uncertainty Reduce the likelihood of cost and completion time

overruns for a project Can be added to the overall project or to specific

activities or work packages Can be determined from previous similar projects

Changing Baseline Schedule and Budget Unforeseen events may dictate a reformulation of

the budget and schedule.

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Creating a Database for Estimating

FIGURE 5.7

Estimating Database Templates

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Key Terms

Apportionment methods

Bottom-up estimates

Contingency funds

Delphi method

Direct costs

Function points

Interaction costs

Learning curves

Overhead costsPadding estimatesPhase estimatingRatio methodsTemplate methodTime and cost databasesTop-down estimates